I have been investing ₹5,000 each month in Franklin Prima Plus and Franklin Flexi Cap Funds for the last 26 months. While I have stopped contribution to Franklin Flexi Cap since September 2016, I will continue with Franklin India Prima Plus for another five years. Further, from August 2016, I have commenced SIPs of ₹5,000 each in Kotak Select Focus and Birla Sun Life Equity, ₹4,000 per month in SBI Blue Chip and ₹2,000 per month in ICICI Pru Focused Blue Chip Equity. All these investments have a five-year horizon.

I have also invested a lumpsum of ₹2 lakh in HDFC Balanced Fund and ICICI Pru Balanced Advantage Fund and ₹50,000 in Mirae Emerging Blue Chip Fund recently with a five-year horizon.

I will be retiring in June 2021 and will be earning a decent pension.

I will also have my provident fund contribution which would be around ₹80 lakh.

Kindly comment on my fund choices.

R Bharath Kumar

We usually don’t recommend commencing investments in equity funds to someone who is five years short of retirement. The risk of capital erosion due to market vagaries is high and may decimate the corpus you want to create for a regular income stream, post retirement. In your case, you have mentioned that you will be earning a decent pension and have lumpsum investments in less risky balanced funds as well. Besides, at the time of your retirement, you can also invest the PF corpus in safer debt instruments and earn a regular income out of it.

Hence, we assume that even if the equity funds don’t do well in the five-year period, you will have the elbow room to wait it out for another 2-3 years before you can cash out. To your credit, you have taken care to invest predominantly in solid large-cap oriented funds such as Franklin Prima Plus, Kotak Select Focus, Birla Sun Life Equity, SBI Bluechip and ICICI Pru Focused Bluechip. These will help contain downside relatively better than mid and small-cap funds. Your only high-risk investment seems to be Mirae Emerging Bluechip.

In case the going is good and the returns have exceeded your expectations, you can book profits earlier than the five-year period and move your investments to debt instruments. Remember, though, that every monthly SIP in an equity fund has to remain invested for a year to be free from capital gains tax.

I am planning to invest ₹10,000 in monthly SIPs for the next 5-10 years. The funds are: Franklin Smaller Companies - ₹3,000; BNP Paribas Midcap - ₹3,000; HDFC Balanced - ₹3,000 and Franklin High Growth Companies - ₹1,000.

Will these yield a 10-12 per cent return on an annual basis? Please advise on my choices.

Arun Kumar Jain

Your fund choices per se are good, with all funds being top quartile performers. Your return expectation of 12 per cent per annum is also realistic. Going by history, these funds have outdone your expectations by a comfortable margin.

The two mid/small-cap funds have clocked compounded annual returns of 25-30 per cent in the last five years and 12-16 per cent in the last 10 years. Franklin High Growth, a multi-cap fund, boasts of a similar 25 per cent return in a five-year period, while HDFC Balanced has scored 15-18 per cent returns over five and 10-year timeframes.

But at the same time, there are two things you need to think about. One is your time horizon. If you don’t have any specific goals to be met at the end of the 5-10 years, you can think of extending your investment period to meet long-term goals such as funding your retirement. You can also increase the monthly allocations towards SIPs as your income and hence investible surplus increases over the years.

Secondly, you need to assess your risk appetite. As per the current allocation, 70 per cent of your monthly sums will go into mid and small-cap and multi-cap funds, suggesting a high risk appetite.

If you have only a moderate ability to take risk, you can bring this ratio down by replacing one of the funds with a large-cap oriented fund such as SBI Magnum Equity or Birla Sun Life Frontline Equity.

Send your queries to mf@thehindu.co.in

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